Thursday, July 17, 2008

UBS Tax Shelter Folds its Tent

The Senate hearings involving UBS had a surprising conclusion. The bank all but admitted to fraud, and promised to reform. Whether the reform is real remains to be seen. From Friday's NY Times story:

Mark Branson, chief financial officer of the UBS global wealth management group, told a Senate subcommittee that the company would provide banking or securities services to United States residents only through companies licensed in this country and that it would help the federal government identify American citizens engaging in tax fraud.

On Wednesday, a Senate permanent subcommittee on investigations released a report saying that UBS’s offshore practices helped American citizens hide an estimated $18 billion in 19,000 accounts from the Internal Revenue Service.

Bravo for Levin and the committee for this progress. Hopefully this move by UBS will not prevent the enactment of legislation that reduces the opportunity for fraud.

Other banks remain recalcitrant.

Mr. Kieber told the subcommittee that LGT had used sophisticated methods to avoid detection by American tax authorities. LGT customers were advised to use only public phones to contact the bank, and the company mailed correspondence from nearby Austria or Switzerland, he said.

Michael Robinson, a spokesman for LGT, said in an e-mail statement to a reporter that the documents Mr. Kieber supplied dated “back to a time when the regulatory environment was completely different.”

Ironically, the Google-placed ads associated with the Times story may be pitching just the kinds of accounts that the Senators are investigating. Here they are.

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It appears that there is more work to be done.

Senator Levin (D-MI) with cosponsors including Senator Coleman (R-MN) and three other Senators including Senator Obama introduced legislation last year aimed at restricting the use of off shore shelters. The text of the legislation in Thomas is available here: Bill Summary & Status file.

A shortcoming of the legislation is that it is one sided. It focusses on Americans hiding assets abroad. This is a problem, clearly. It would also be worth while to go after foreigners hiding assets here.

Because there is no withholding tax foreigners pay no U.S. taxes on income earned from investments here. And a substantial amount of money goes unreported abroad. Hopefully the next president will cooperate with countries around the world to prevent this sort of tax avoidance fraud.

As we document in Trading Away Our Future, the abolition of the withholding tax is one of the culprits in encouraging Americans to borrow rather than save. It helped smooth the way for our dangerous habit of borrowing to pay for imports rather than trading to pay for imports.

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